Institutional Shareholder Activism: A Sea Change?

Profession:Herbert Smith

Two major statements about institutional shareholder activism were published in October; the first by the Institutional Shareholders' Committee (ISC) and the second by Hermes Pensions Management (Hermes). For listed companies, these provide an insight into institutional thinking, an indication of the practical implications of the institutional shareholder activism debate and a forewarning of the questions that companies may be pressed by their shareholders to answer as they move into the next cycle of annual reporting and general meetings.

Cynical observers have viewed the ISC publication merely as an attempt by institutions to ward off a threatened change in the law, following the Myners report, which would place them under a duty to intervene in companies if to do so would be in the best interests of shareholders and beneficiaries. Opposition to that proposal certainly seems to have given a new lease of life to the ISC, an umbrella body for the Association of British Insurers (ABI), the Association of Investment Trust Companies, the Investment Management Association and the National Association of Pension Funds (NAPF), which had become largely moribund during the 1990s. The ISC hopes that its new Statement of Principles will enhance institutional involvement and improve company accountability and so convince the government that legislation is not needed. In addition to this political pressure, shareholder activism has of course also been given added impetus by the fall-out from high profile collapses like Enron and WorldCom - which has led to a raft of corporate governance initiatives.

Hermes on the other hand has not needed any encouragement to be vocal on institutional shareholder issues and has a long history of involvement. Its new Statement of Principles focuses instead on what it sees as the prerequisites for creating shareholder value.

Voting levels have already increased

The political pressure on institutions and the changed economic climate may already be having some effect on voting levels. Recent surveys carried out by PIRC and by Manifest, the proxy voting agency, indicate that voting levels at UK companies are up. Manifest's analysis of voting trends, published in September this year, looked at meetings held during the first seven months of 2002 by companies in the FTSE All-Share index and compared them to those held in the same period in 2001. The overall level of voting had increased to 55.86%, compared with 52.72% in 2001, although across the board turnout still fell short of the DTI target of 60% of possible votes lodged. The average turnout at FTSE 100 general meetings was in fact lower than the average - at 49% - although FTSE 250 companies did hit the 60% target. Manifest suspects that the explanation for the "missing" votes at FTSE 100 companies lies in their higher levels of overseas ownership. It asks some interesting questions about why this is so, given that US institutions, who are required to exercise their votes, comprise a considerable proportion of the overseas holders. Is it the case that they are giving voting instructions, but these are not being converted into votes at the company meetings? Or is it the case that FTSE 100 levels of voting are being dragged down by Continental European and other non-US institutional investors who are displaying less interest in corporate governance and voting matters?

It will be interesting to see how the introduction of the CREST domestic proxy voting service in January 2003 will affect voting levels. Of course, whilst it will make it easier for registered shareholders to appoint and instruct their proxies, it will not be of direct assistance to beneficial owners, such as overseas shareholders, who are reliant on their nominees to implement their voting instructions.

Increase in the use of abstentions

More significantly, both Manifest and PIRC have also identified a rising trend in shareholder dissent - largely via the use of abstentions. PIRC looked at proxy voting results for AGMs between July 2001 and July 2002 in the FTSE All-Share index. Over 3% of the companies in its sample recorded votes against of more than 20% on one or more resolutions. Over 6% of companies recorded abstentions in excess of 20%. PIRC found that share schemes exceeding normal dilution guidelines were the single most contentious issue in terms of attracting the largest opposition votes, followed by directors' pay issues.

Manifest highlights an increase in the use of abstentions and notes that the overall level of dissension, combining abstentions with votes against, has risen during the year by 18%. Manifest also notes in particular that of the companies that voluntarily put their remuneration policy to a shareholder vote, nine had high abstain votes - of greater than 10% of the votes cast. Manifest speculates that this may...

To continue reading